Social Security Explained: How It Works, Types of Benefits

What Is Social Security?

“Social Security” is the term used for the Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States, which is run by the Social Security Administration (SSA), a federal agency. Though it is best known for retirement benefits, it also provides survivor benefits and income for workers who become disabled.

As of September 2022, more than 70.61 million Americans were collecting benefits. Let’s look at how Social Security works and how much money you can expect to get from it.

How Social Security Works

Social Security is an insurance program. Workers pay into the program, typically through payroll withholding where they work. Self-employed workers pay Social Security taxes when they file their federal tax returns.

Workers can earn up to four credits each year. In 2022, for every $1,510 earned, one credit is granted until $6,040, or four credits, has been achieved. In 2023, it will be $1,640 until $6,560. That money goes into two Social Security trust funds—the Old-Age and Survivors Insurance Trust Fund (OASI) for retirees and the Disability Insurance Trust Fund (DI) for disability beneficiaries—where it is used to pay benefits to people currently eligible for them. The money that is not spent remains in the trust funds.

A board of trustees oversees the financial operation of the two Social Security trust funds. Four of the six members are the secretaries of the departments of Treasury, Labor, and Health and Human Services, and the Commissioner of Social Security. The remaining two members are public representatives appointed by the president and confirmed by the Senate.

Medicare, the federal health insurance program for Americans 65 and older and some people with disabilities, is also supported through payroll withholding. That money goes into a third trust fund, which is managed by the Centers for Medicare & Medicaid Services (CMS).

Types and Amounts of Social Security Benefits

Social Security provides benefits to retirees, their survivors, and workers who become disabled.

Retirement Benefits

Workers who have paid into the Social Security system for at least 10 years become eligible for early retirement benefits at age 62. Waiting until your “full retirement age (FRA)”—between 66 and 67 depending on when you were born—results in higher monthly benefits. If you delay collecting retirement benefits to age 70, then you will receive even more, but benefits don’t increase if you wait longer than that.

Spouses can also claim benefits based on either their own earnings record or their spouse’s. A divorced spouse who is not currently married can receive benefits based on an ex-spouse’s earnings record if the marriage lasted at least 10 years. Children of retirees can also receive benefits until they turn 18 (longer if the child is disabled or a student). The cutoff is 16 if you are caring for a child who is not your own.

How Much Can I Get in Retirement Benefits?

How much you can get in your Social Security retirement benefit depends on your average indexed monthly earnings (AIME) during your 35 highest-earning years. Because of this, amounts will differ significantly among retirees. The average monthly benefit as of December 2022 was $1,688.35 ($20,260.20 annually).

Your annual amount increases by 8% for each year you delay collecting benefits, starting at age 62 and stopping at 70. The benefit, thus, varies depending upon when you start taking it. In 2023, the maximum monthly benefit for people aged 62 is $2,572 ($30,864 annually), while for people aged 70 it is $4,555 ($54,660 annually). In addition, there is a yearly cost-of-living adjustment made to Social Security benefits, to keep pace with inflation. In 2023, it will increase by 8.7%.

Social Security provides a special minimum benefit for long-term low earners first enacted in 1972. You must have income for at least 11 years to qualify for it. In 2022, the special monthly minimum benefit is $45.50 ($546 annually). It increases for each additional year of low-income work, topping out at $950.80 ($11,409.60) for people who have worked for 30 years. In 2023, the special monthly minimum benefit is $49.40 ($592.80 annually), topping out at $1,033.50 ($12,402) for people who have worked for 30 years.

Disability Benefits

People who can’t work due to a physical or mental disability that is expected to last for a year or more—or result in death—may be eligible for Social Security disability benefits (SSDI). To qualify, you generally have to meet certain earnings tests. Family members of disabled workers can also be eligible.

How Much Can I Get in Disability Benefits?

As of December 2022, a little under nine million Americans were collecting SSDI. The average monthly benefit was $1,340.86 ($16,090.32 annually). For disabled workers, the monthly average was $1,483.10 ($17,797.20 annually). Spouses of disabled workers received an average of $408.42 monthly ($4,901.04 annually), and children of disabled workers got $470.77 monthly ($5,649.24 annually).

Survivor Benefits

The spouse and children of a deceased worker may be eligible for survivor benefits based on the worker’s earnings record. That includes surviving spouses who are 60 or older, or 50 or older and disabled, provided they have not remarried. A surviving spouse who is caring for a child who is younger than 16 or disabled may be eligible for these benefits too.

For children to receive benefits, they must generally be younger than 18 or disabled. Under certain circumstances, a stepchild, a grandchild, a step-grandchild, or an adopted child may also qualify for benefits.

Parents aged 62 or older who were dependent upon a deceased worker for at least half of their income may also be able to collect benefits. In some circumstances, surviving spouses and minor children are also entitled to a one-time payment of $255 after an eligible worker’s death.

How Much Can I Get in Survivor Benefits?

Approximately 5.68 million people were collecting survivor benefits as of December 2022. The average monthly benefit was $1,447.08 ($17,364.96 annually). Survivor benefits break down into five categories. Average payments were:

• Children of deceased workers: $1,067.36 monthly ($12,808.32 annually)
• Widowed mothers and fathers: $1,231.86 monthly ($14,782.32 annually)
• Nondisabled widow(er)s: $1,705.27 monthly ($20,463.24 annually)
• Disabled widow(er)s: $892.87 monthly ($10,714.44 annually)
• Parents of deceased workers: $1,537.98 monthly ($18,455.76 annually)
  

The History of Social Security

The Social Security system in the U.S. came into existence on Aug. 14, 1935, when President Franklin D. Roosevelt signed the Social Security Act into law. The first monthly benefits checks became payable on Jan. 1, 1940, and the first person to collect one was Ida M. Fuller, a retired legal secretary in Vermont. Her check was for $22.54.

The system and its rules have evolved in the decades since. Today, Social Security is one of the largest government programs in the world, paying out hundreds of billions of dollars each year.

The Future of Social Security

With the aging of the U.S. population, some observers have raised concerns about the viability of a system in which fewer active workers will be supporting greater numbers of retirees.

In its 2022 report, the Social Security Board of Trustees forecasts that the retirement fund (OASI Trust Fund) reserves will become depleted in 2034, after which tax revenue will be enough to pay 77% of scheduled benefits. The trustees also projected reserves of the Hospital Insurance (HI) Trust Fund, which finances Medicare Part A, will be depleted in 2028, at which point program income will cover 90% of benefits.

If those predictions hold, Congress will need to find ways to fill the gap, which might mean higher taxes on workers, lower benefits, higher age requirements for retirees, or some combination of these elements.

The Bottom Line

The enactment of Social Security in 1935 was one of the signature achievements of President Franklin Delano Roosevelt’s administration, and the program remains a cornerstone of most Americans’ retirement, serving approximately 70.61 million people. Benefit amounts vary depending on income and years of employment. In addition to retired workers, their surviving spouses, children, and parents, and disabled workers and their family members, may also be eligible to collect benefits.

With the average retired worker benefit amounting to about $20,000 annually, the program shouldn’t be relied on as your sole source of retirement income. It’s important to supplement it with other retirement options, such as an individual retirement account (IRA) or an employer-sponsored plan, such as a 401(k) or 403(b), as well as other savings and investments.